Bleak view as life industry &#39runs out of money&#39

There is no bigger thorn in the side of the UK life industry than iconoclastic analyst Ned Cazalet. Life 2002 – his eagerly anticipated annual compendium of the life industry – has just been published, presenting a bleak view of an industry pushed hard against the ropes financially by three successive years of falling stockmarkets.

His most startling finding is that the life industry as a whole has run out of money. Statutory returns that he has scrutinised show that at the end of last year the life industry as a whole had only £40bn in free assets. Given the £225bn held in equities at the start of the year, the plunging markets will have reduced those free assets to zero, says Cazalet.

Given the vagaries of life office accounting, this does not mean there will be no money in the future. By changing accounting bases, Cazalet says they will be able to liberate new money, but this he warns will be at the expense of future bonuses which he says will continue to be cut. He also says the room for manoeuvre for many offices is going to be further restricted by the need to switch from equities into fixed interest.

Given the parlous state of the sector, the cost of new business – commission, marketing costs – which amounted to £45bn last year becomes a major challenge when the coffers are bare, he says.

But Cazalet cautions this view of the industry does not mean that all companies are in the same boat – some are still in a strong position whereas others will be very weak indeed. However, he warns us not to expect a rash of mergers and acquisitions – instead we can expect companies to sell off bits of their business in a piecemeal fashion to keep their heads above water.

Unsurprisingly, the life companies are scathing in their response. Legal & General, which is raising £800m through a rights issue, and which Cazalet says was looking “to be a bit short of the folding stuff”, is unimpressed.

Head of public relations John Morgan says: “My 11-year-old son could have told you about the problems of the industry. All Cazalet was highlighting is what the regulator already knows. Is it good to for the industry to be publicised like this?”

He says IFAs should take comfort from the FSA&#39s recent announcement that it was comfortable with life offices&#39 ability to withstand further falls in the stockmarkets.

Morgan claims Cazalet will know less about his company than the City analysts from investment banks and shareholders who L&G meet on a continuous basis. Cazalet, for his part, believes the city analysts have been hoodwinked by the life companies who say that all is fine and then surprise the market by going to it to raise capital.

Friends Provident is described as the Oliver Twist of the industry by Cazalet for considering further capital raising. Cazalet says the bear market has erased the money from its demutualisation last year to leave it in a position worse than it was before. Friends disagrees, questioning how deep his knowledge of the company is.

Unlike many of his City counterparts, Cazalet takes as much time looking into the books of mutual companies as the listed companies which his City colleagues examine. Standard Life in particular has been singled out for attention, given its strategy of not moving out of equities, resulting in a furious spat between Europe&#39s largest mutual and Cazalet.

Chartwell Investment Management director Patrick Connolly agrees with Cazalet&#39s analysis of with-profits companies. “Clearly there are a number of companies who are really struggling. A lot will not only move out of equities but out of with-profits altogether,” he says. However, despite Cazalet&#39s analysis, he still rates Standard Life alongside Norwich Union and Prudential.

The empty coffers of the with-profits offices are precisely the reason for Hargreaves Lansdown&#39s controversial decision to stop selling with-profits.

As Cazalet has repeatedly pointed out, investments in with-profits are investments in the provider company and IFAs should be making recommendations based on the strength of the provider.

The notorious secrecy surrounding the actual determinations of actuaries in the life companies offering with-profits has left IFAs with an uphill struggle to get information.

Informed Choice managing director Nick Bamford has recently carried out a survey of with-profits. Of the 12 companies his company approached with questionnaires, only Standard Life, Scottish Equitable, Legal & General, Scottish Mutual and Friends Provident answered. But none were willing to divulge their reserves.

Because of the other companies&#39 lack of co-operation, Informed Choice will not be placing any future with-profits business with Norwich Union, Prudential, Scottish Widows, Scottish Life, Clerical Medical and AMP NPI. Axa provided a belated response – but it has now withdrawn from with-profits.

While much of the life industry is taken up with tales of doom, Cazalet does tip a couple of companies to benefit from the bloodbath he foresees. He thinks that Scottish Widows will do so, on account of the strength of its parent Lloyds TSB, and that Prudential will reap the rewards of its prescient switch from equities to bonds in 2000.

He also notes that Pru is returning to a more diversified product range because of difficulties in the with-profits market. Given the variety of opinions, IFAs have the unenviable task of making their decisions about which company to place business with on the diverse information that is available.

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